Giuditta Perinelli

Abstract: Using security-level holdings of bond and equity fund shares, we show how different investors respond to inflation shocks, distinguishing between cost-push (‘bad”) inflation and demand-driven (good”) inflation. We compare flows across different fund shares - held by different investors - within the same fund. In the aggregate, bad inflation shocks lead to stagflation, hurting bond and equity funds’ performance and leading to outflows. By contrast, good inflation shocks raise expected inflation when economic activity is high, hurting bonds but lifting equity. We show that aggregate responses are driven primarily by the re-balancing of Investment Funds who respond quickly and strongly to shocks. Households’ response is less pronounced quantitatively but persistent. By contrast, Insurance Companies are ‘steady-hand” investors, showing an overall more muted reaction to inflation shocks.

Abstract: Does the investment response to inflation expectations grow with the forecast horizon? Existing evidence stops at one year. Using a randomized information experiment linked to balance sheet data on Italian firms, we show that the causal investment semi-elasticity nearly doubles from six months to three-to-five years, with the response four times larger for tangible than intangible assets. These patterns, with heterogeneity by leverage and debt maturity, point to a Mundell-Tobin channel: expected inflation erodes the real burden of fixed-rate debt, lowering the cost of new capital. A sufficient statistic mapping debt structure to the investment response formalizes the mechanism.